There are major changes to how people aged 55 and over can access their money purchase pension savings from April 2015.
There will now be much greater flexibility, which is achieved in one of three ways as follows:
- Taking 25% of the pension fund as a tax free lump sum and purchasing an annuity will the balance as at present.
- Allocating some or all of a pension fund into “flexi-access drawdown account”. When that allocation is made then a tax-free lump sum of 25% can be taken as at present. The person can decide how much or how little is taken thereafter, but any further withdrawals from the account will then count as taxable income in the tax year that the withdrawal is made.
- Alternatively, a single or series of lump sums can be taken from the pension fund. These are called “uncrystallised funds pension lump sum”. When a lump sum is taken in this way then 25% of the lump sum will be tax-free, with the balance counting towards taxable income in the tax year when the lump sum is taken.
Extension to People with Existing Annuities
From April 2016 restrictions on people buying and selling existing annuities will be removed, allowing pensioners to sell the income they receive for a capital sum. This right will not include the right to sell their annuity back to the original provider.
The capital sum can then be taken as a lump sum withdrawal, or placed into drawdown and withdrawn gradually. In either case income tax will be payable in the year that the funds are accessed.
Future Changes to the Lifetime Allowance
The amount of pension savings on which an individual can receive tax relief will decrease from the current limit of £1,250,000 to £1,000,000 from 2016-17. From April 2018 this limit will increase annually in line with the Consumer Prices Index.